GB regulatory approach RIIO price controls and distributed generation

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1 GB regulatory approach RIIO price controls and distributed generation October 2016 James Veaney Head of Connections and Constraints Management

2 Background Much of network installed in 1950s and 60s with some assets over 80 years old 14 licenses owned by six companies 16% of the average domestic electricity bill 4bn paid annually by GB customers Combined asset value of 18bn *In Scotland, 132kV is part of the transmission system

3 Background Price Controls Network Companies are natural monopolies In line with our principle statutory duty to protect energy customers we regulate energy network companies. We have several regulatory mechanisms and tools at our disposal. Price controls are a very important part of our regulatory arrangements. In a price control review we set a limit on the amount of revenue that companies can collect during the price control period. If companies costs are lower than the allowed revenue, then the company gets to keep a share of the profits and vice versa. Companies can also earn rewards or penalties through their delivery of set outputs (versus set targets).

4 RIIO: A new approach to price controls RPI-X used as basis for regulating energy networks for since early 1990s delivered significant benefits for consumers: 20% reduction in 30% reduction in 60bn More efficient Improved quality network charges power cuts Investment financing of service Networks focused on short term BUT stakeholders suggested framework led to: Networks focused on Ofgem not customers Limited innovation Limited appetite for risk Bias for capex solutions Limited focus on crosssectoral interactions RPI-X was not broken, but RIIO introduced as new fit for purpose framework

5 RIIO: A new approach to price controls Constraint set up front to ensure: Revenue = Incentives + Innovation + Outputs Timely and efficient delivery Network companies are financeable Transparency and predictability Deliver outputs efficiently over time with: Balance between costs faced by current and future consumers 8 yr control Rewards/penalties for delivery Upfront efficiency rate Core price control incentives Technical and commercial innovation encouraged through: Option to give third parties a greater role in delivery Innovation stimulus package Outputs set out in clear contract, reflecting expectations of current and future consumers

6 Stakeholder engagement DNOs must demonstrate engagement in developing their business plans Ofgem-led elements: Price Control Review Forum (PCRF): high level stakeholder group which will provide input to Ofgem and the DNOs about a range of aspects of the price control Consumer Challenge Group (CCG): This is a small group of consumer experts which act as a critical friend to Ofgem in ensuring that the views of consumers are considered fully in the review Working groups: A range of groups where Ofgem, DNOs and other stakeholders discussed specific issues in depth. Detailed design of outputs and incentives. Flexibility and capacity; Environment; Innovation; Reliability and safety; Connections; Customer and social issues; Finance; Cost assessment And of course, consultation throughout the process

7 RIIO-ED1 Process Initial Strategy consultation: Sept - Oct Business plans submitted: July Fast track Decision: Feb Draft determination: July Launch consultation: Feb 2012 Strategy Decision: March Fast track Consultation: Oct Final Determination: Nov policy development business plan assessment business plan assessment Throughout: Effective stakeholder engagement by us and network companies 8 year price control: 1 April March 2023 Process built on learning from transmission and gas distribution price controls (RIIO-T1 and RIIO-GD1) Policies built on previous electricity distribution price control (DPCR5)

8 RIIO-ED1 Key Challenges Driving factors Government policy and subsidy regime Other incentive mechanisms Local planning rules Technological developments & reductions in cost Facilitating factors Investment to expand and reinforce the distribution network Greater use of smart grid technology & DSR to maximise network flexibility at minimum cost ED targets Uncertainty around the characteristics, rate and location of take-up of these technologies Standard asset life ED2 Ensure low carbon technologies can connect in appropriate time at appropriate cost

9 RIIO Outputs strong focus on what network companies will deliver Environmental impact Customer satisfaction Six Output Categories Connections Safety Reliability and availability Social obligations Developed through extensive stakeholder engagement The delivery of these outputs linked to DNOs allowed revenue amount. The DNOs incur rewards and penalties for out/under performance of these outputs

10 Innovation Stimulus Package RIIO has a number of elements that drive innovation: Longer price control periods, Equalised opex and capex No with hindsight adjustments Focus on delivery of outputs. Network Innovation Competition Network Innovation Allowance Replace Innovation Funding Incentive and Low Carbon Network Fund. Single annual competition covering elec transmission & distribution. The amount available for and is 90m per year. It will be reviewed going forwards. Fund innovation within DNOs allowed revenue (use it or lose it). Fund small projects that meet published criteria. Size of funding is based on the quality of the Innovation Strategy in the DNO business plans (0.5 to 1% of base revenue). Innovation Roll-out Mechanism DNOs can apply for additional funding to roll-out a proven innovation. Where the innovation meets pre-defined environmental criteria but there are not sufficient benefits for DNO to fund roll-out.

11 Uncertainty Mechanisms Some factors are outside of the DNO s control. The risk should be shared equitably between DNO and customers Protects customers Allows DNOs to provide outputs Reduced cost of capital and therefore cost to customers Different types of uncertainty mechanism, depending on the type of uncertainty, eg: Load related reopener Smart meter volume driver Indexation of allowed revenues

12 Business plans Companies required to develop well-justified business plans setting out How they will deliver in the interests of current and future consumers How they will meet the challenge of moving to a low carbon economy A strategy for dealing with risks and uncertainties Companies will need to: justify their strategy for output delivery against an understanding of the long-term trends they face show they have considered a range of stakeholder views and opportunities for innovative approaches include a holistic view of the price control package including financeability metrics A high quality business plan can be fast-tracked and have the price control concluded early. In RIIO-ED1 one company was fast-tracked, the others had 2bn of cuts made to their plans

13 The growth of DG

14 10GW of PV now connected over 6GW in last 2 years Forecasting is challenging

15 With growth comes system issues Connections to Distribution network in South West Total MW - connected, accepted and offered Biomass and energy crops (not CHP) 111,050 CHP 68,648 Offshore wind 181,351 Onshore wind 202,433 Photovoltaic 2,593,920 Waste incineration 115,765 Other generation 649,522 Total 3,922,689 Winter Maximum Demand 2,530,000 Summer Minimum Demand 980,000 Fundamental changes to flows of energy regions built to handle demand now net export Network capacity exhausted - Grid constraints are becoming more severe DG can reduce demand on the network (ie.excess generation at times of low demand). Challenge to keep system voltages within limits - resulting in restrictions on transmission-connected generation and what the DNO can connect

16 . and customer service challenges 5 years ago, generators had a lengthy list of complaints Application process was long winded Little information available up front to inform connection choice Customer service was patchy Hard to know what you were paying for Different arrangements in different DNO regions No innovation or desire to find ways around a problem At times, far too expensive At times, far too long to connect Ofgem-led DG Forum events and RIIO-ED1 Incentive on Connections Engagement (ICE) introduced to focus DNOs on customer needs or face financial penalties Progress has been made

17 DNOs have responded Online application and access to data DG surgeries Connection guides Consortium arrangements to share cost Heat maps DG-DNO steering group established Transmission-Distribution Steering Group established

18 Innovation has enabled smarter approaches We ve invested nearly 100m of customer money funding innovative projects to release capacity/improve connections for DG Flexible Plug and Play (UKPN) Low carbon hub (WPD) Active Network Management (SSE) Real time thermal ratings (NPG) Kent Area System Management (UKPN) Accelerating Renewable Connections (ARC) (SP) FlexDGrid (WPD) Capacity to Customers (ENWL) Low Voltage Network Templates (WPD) Network Equilibrium (WPD) These are now becoming business as usual. Customers should have a choice between firm and a viable non-firm offer or an explanation why not.

19 Change and the need for flexibility We need new forms of flexibility and we want to maintain service and reliability while keeping costs down for consumers

20 The need for more flexibility in the system Last year we published a position paper Making the electricity system more flexible and delivering the benefits for consumers Our five priorities: o Storage o Expanded role for Distribution Network Operators DSOs o Role of aggregators o Industrial and Commercial consumers potential to offer flexibility o Network charging Working with government

21 Forthcoming call for evidence structure 1. Removing policy and regulatory barriers Storage Aggregators 2. Providing price signals for flexibility 3. A system for the consumer Smart appliances Electric vehicles Consumer protection 4. The role of different parties in system and network operation The potential move to DSOs and the DSO-TSO relationship 5. Innovation

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